Houston, TX Capital Markets
How is Houston Performing?
Individuals and businesses interested in purchasing, selling, or renting commercial properties are gravitating toward Houston for their CRE investments. They are drawn to the city’s thriving market that continues to experience rapid growth. Its strategic location, extensive transportation infrastructure, and robust economy make the market a prime destination for businesses looking to establish or expand their presence. Furthermore, Houston’s resilient market has weathered various economic fluctuations, making it an enticing option for buyers, sellers, and tenants seeking stability and long-term growth.
Houston’s multifamily market sales activity has slowed significantly in recent quarters as the impact of increasing borrowing costs becomes apparent. From Q3 2022 to Q1 2023, total sales volume had been on a gradual decline, while sales in Q1 2023 fell to the lowest Q1 since 2017. As of Q3 2023, there has been a shift in the composition of the buyer pool compared to 2022. Institutional capital and private equity have become more cautious and mainly observe from the sidelines. On the other hand, private capital has emerged as the primary driving force behind investment activity in Houston, accounting for more than 60% of the buyer volume in the past four quarters.
Sales activity in the hotel industry has remained high in 2023, with 43 transactions taking place since January. Keep in mind that the state of Texas is an undisclosed state, leading to limited availability of pricing information for the Houston market. Year-to-date (YTD) hotel sales have mainly involved upscale to upper midscale properties. The majority of these transactions occurred in the George Bush Airport Area submarket, while other significant sales occurred in the Houston Hobby Airport/NASA submarket.
Despite higher borrowing costs and a widening bid-ask spread, Houston’s retail investment market remains highly active. Although transaction volumes have decreased in the past three consecutive quarters leading up to Q2 2023, H1 2023 still demonstrated remarkable strength. CoStar Group estimates that retail property sales during H1 2023 exceeded $1.7 billion, making it the second-highest total ever recorded, only surpassed by the $2.8 billion achieved in H1 2022.
As of Q3 2023, the average pricing in Houston aligns with the national standard, standing at $250 per square foot. Despite the influence of increasing interest rates on pricing, Houston’s retail market has managed to maintain record-high prices due to robust growth in net operating income (NOI) and the prevalence of high-quality deals attracting investors.
Houston’s industrial investment market is experiencing a slowdown in Q3 2023 following a solid performance in 2022. In Q1 2023, the disclosed sales of industrial properties amounted to $100 million, marking the weakest first-quarter outcome since 2016. However, after estimating the prices of properties sold without disclosure, CoStar Group approximates that the total industrial property sales in Q1 2023 reached $640 million, roughly half of the average first-quarter sales volume observed over the past three years. The slowdown in investment activity can be attributed to higher interest rates, widening bid-ask spreads, and stricter lending criteria, all of which are impacting the market.
Institutional, public REIT, and private equity investors have been the most prominent buyers in the market, representing nearly 66% of the total sales activity in the past three years. This trend has continued consistently over the past 12 months as well.
The volume of transactions in Houston’s office market has significantly slowed since H2 2022, reaching a level similar to the beginning of 2020. Investment sales activity is expected to continue to decrease soon due to anticipated interest rate hikes throughout the year. The higher borrowing costs will result in increased equity requirements for borrowers, further contributing to the deceleration of deal flow. As of Q3 2023, the average pricing in the market is estimated to be $210 per square foot, which is significantly lower than the national average of $300 per square foot.